Transcript GOLDMAN SACHS 2003 PROJECTIONS

Presentation to the
IPAA Private Capital
Conference
April 19, 2004
Kurt A. Talbot
Head of E&P Capital
Goldman, Sachs & Co.
Overview
• Who plays E&P?
• Capital providers have constraints
• Why is investing in E&P so difficult?
• Who is Goldman Sachs E&P Capital?
E&P Capital Providers
Beacon
Enron
Koch
Kayne Anderson
RIMCO
John
Hancock
Torch
ENCAP
TCW
NGP
First Reserve
Prudential
NYL
1982
1984
1986
1988
1990
Aquila
Macquarie
Goldman
GE Stratum
Sachs
MG
Williams
Cerberus
Cambrian
Duke
Wells Fargo
Constellation
Quantum
Deutsche
RBS
Shell
Bank
KCS
PetroBridge
Lime Rock
Tenneco Range/Domain Black Rock
Ventures
Cargill
Harvard
1992
1994
1996
Mirant
1998
2000
2002
2003
Capital Providers Fall Into
Two Basic Groups
Regulated Entities
• Banks, Insurance Companies, ERISA Funds
Non-Regulated Entities
• Corporations
• Merchant Energy Companies
• Commodity Trading Companies
• Investment & Merchant Banks
• Hedge Funds
E&P Capital Providers
Beacon
Enron
Koch
Kayne Anderson
RIMCO
John
Hancock
Torch
GE
MG
ENCAP
Cambrian
NGP
KCS
First Reserve
1982
Tenneco
Ventures
Prudential
1984
1986
1988
Mirant
Stratum
Williams
Wells Fargo
Quantum
Deutsche
TCW
NYL
Aquila
1990
1992
1994
Maquarie
Goldman
CerberusSachs
Duke
Constellation
RBS
Shell
Bank
PetroBridge
Lime Rock
Range/Domain Black Rock
Cargill
Harvard
1996
1998
2000
2002
2003
Capital Provider’s Have
Constraints
Regulated Entities
•
•
•
•
Strong credit skills, usually strong industry experience
Specific structures, less flexibility on underwriting criteria
Less flexibility on pricing
Limited transaction size
• Reserve requirements
• Mandated diversification
• May require a investment to be rated by S&P or Moody
• Follow up investments can cause conflicts
• External constraints
Capital Provider’s Have
Constraints
Non-Regulated Entities
•
•
•
•
•
•
Credit skills and industry experience vary widely
Flexibility in structure, pricing, and underwriting criteria
Potentially larger investments
Internal policy dictates diversification requirements
Follow up investments desired
Internal constraints
Why is Investing in E&P so
Difficult?
Beacon
Enron
Koch
Kayne Anderson
RIMCO
John
Hancock
Torch
GE
MG
ENCAP
Cambrian
NGP
KCS
First Reserve
1982
Tenneco
Ventures
Prudential
1984
1986
1988
Mirant
Stratu
m Williams
Wells Fargo
Quantum
Deutsche
TCW
NYL
Aquila
1990
1992
1994
Maquarie
Goldman
CerberusSachs
Duke
Constellation
RBS
Shell
Bank
Petrobridge
Lime Rock
Range/Domain Black Rock
Cargill
Harvard
1996
1998
2000
2002
2003
Industry Types Think of Risk
primarily as Technical, or
Commodity Related
Technical
• Reserves & Production
• Proven vs. Unproven
• Developed vs. Undeveloped
• Project Execution and Operations
• People
• Drilling wells, Installing Waterfloods, Recompleting,
Stimulating
• CAPEX, OPEX, G&A
Industry Types Think of Risk
primarily as Technical, or
Commodity Related
Commodity
• Prices are volatile if not hedged
• Hedging requires credit
• Hedging can introduce unintended risk
• Counterparty risk (Remember Enron?)
• Basis risk if physical sales and financial hedge
are done at a different index
• What about nonproducing and undeveloped
volumes?
General Investors worry about
Credit and Structural Risk
Fundamental Credit and Investment Structure
• Project or Corporate
• Guaranteed or Nonrecourse
• Capitalization
• Floating or Fixed Interest Rates
• Ranking and Security
• Covenants
Public or Private, ability to exit
• Is the investment rated?
Return
With so many variables to
consider, can E&P risk be
correctly priced?
These deals are passed
over because they don’t
meet the return threshold,
but they are attractive
relative to the risk.
Risk
These deals get done because
they meet the return threshold, but
they are under priced for the level
of risk taken
E&P HY Index Spread
12-Month Strip Mcfe
4/12/04
3/12/04
2/12/04
1/12/04
12/12/03
11/12/03
10/12/03
9/12/03
8/12/03
7/12/03
6/12/03
5/12/03
4/12/03
3/12/03
2/12/03
1/12/03
12/12/02
11/12/02
10/12/02
9/12/02
8/12/02
7/12/02
6/12/02
5/12/02
4/12/02
Spread
700
$7.00
600
$6.00
500
$5.00
400
$4.00
300
$3.00
200
$2.00
100
$1.00
0
$0.00
12-Month Mcfe Strip Price
Do Capital Markets Correctly
Price All of These Various Risks?
Basis of Competition among Capital
Providers is Taking and Pricing These
Risk
• Wide Disparity in the Perception of these various risks
• Private Deals are difficult to benchmark
• Terms generally not disclosed
• No publicly available performance data
• Not knowing specific terms or covenants, how can you ever
be sure two deals are really comparable?
• Capital providers are forced to rely upon their past
experience and inexact comparisons
• Basis of Competition is the willingness to price risk that
are largely subjective
What’s Attracts Money to Direct
E&P Investments?
Financial Returns
• Superior spreads or security as compared to other
opportunities
• Limited competition, relative to capital market
transactions
Ancillary Business Opportunities
• Agency or Advisory Opportunities
• Fee generating activities
• Commodity Trading
Goldman Sachs E&P Capital
• Principal investing effort for Goldman Sachs
• Not an investment fund
• Based in Houston
• Staffed with experienced E&P professionals
• Kurt Talbot
• 20 years in E&P, 13 years with TCW
• 34 transactions totaling over $900 million
• John Howie
• 22 years in E&P, Encap, Range, Tenneco Ventures, Amoco, Apache
• 30 transactions totaling over $300 million
• Extensive support from GS Commodities Group and other
parts of the firm
Goldman Sachs E&P Capital
• Flexibility
• Not tied to a specific structure
• Not tied to a specific return target
• Principal Investor
• Arranger
• Syndication Participant
Goldman Sachs E&P Capital
Preferred Investments
• Junior and/or Senior Debt
• Volumetric Production Payments
• Drilling Partnerships
Preferred Transaction Size
• $10 - $50 million as a principal
• Several hundred million as an arranger
To Start a Dialog Contact One of
Our E&P Experts
Kurt Talbot
John Howie
Head of E&P Capital
Vice President
713-658-2680
713-658-2682
[email protected]
[email protected]
Goldman Sachs E&P Capital
www.gs.com/epcapital